Speaker Of The Hose Wants Ethics Probe In `Clydewater'

My sock puppet was particularly combative Monday morning. "Hey!" it said, after I slipped it on, "a lot of savings and loans went under in the 1980s. Those were tough times. Give Henry a break!"

We were continuing the dialogue started here yesterday about the involvement of U.S. Rep. Henry Hyde, the Bensenville Republican, in the $67 million failure of Clyde Federal Savings & Loan of North Riverside. I call our joint effort to simplify and clarify this intriguing tale, "The Complete Dumb Sock Puppets Guide to Clydewater."

"Most didn't," I replied. "Roughly two out of every three survived."

Sock Puppet: And the third was just unlucky or victimized by changed accounting rules?

Eric Zorn: Sometimes. But about a quarter of the failures resulted in criminal charges of fraud and insider abuse against the directors and bank officials. In about a fifth of the collapses, the agency responsible for the approximately $200 billion taxpayer bailout of S&Ls filed liability suits against directors. Such a suit was filed in what I'm calling "Clydewater."

SP: Charging what?

EZ: That Hyde and 11 other directors authorized a number of investments so boneheaded and ultimately costly that their actions amounted to "gross negligence," a legal term.

SP: Sounds bad. Like what?

EZ: Like loaning $5 million to a company building luxury, beachfront condos in Port Aransas, Texas. The thrift had no experience with such lending and ended up taking appraisal advice from--guess who?--the very broker who stood to make money if the loan went through.

SP: They might as well have asked a sock puppet!

EZ: Same difference. The government's suit noted that broker's analysis was "insufficient and improper." The borrower defaulted in less than two years, and Clyde lost $3.7 million. It also lost more than $10 million in a series of highly speculative investments in another area where it had no experience--the options market. "The board approved trades which they knew or should have known were irrational," said the suit.

SP: Options? Don't get technical on me. I warned you yesterday, I'm easily bored and confused by tales of financial scandal.

EZ: Courage, hosiery head. The important thing is that board minutes reflect Hyde was an active member--making and seconding motions--at a time when the board was making key decisions at the heart of the lawsuit. This was also at a time when the Federal Home Loan Bank Board was warning Clyde's directors that the thrift was less than a year and a half from insolvency.

SP: Didn't the Supreme Court say that Congress unfairly changed certain accounting rules, contributing to a number of S&L failures?

EZ: Yes. Clyde was not part of that case.

SP: All I know is that the courts "never found any (Clyde) director guilty of negligence and . . . never imposed a fine."

EZ: You're quoting from Hyde's recent letter to the Tribune. Courts never found guilt because the case settled before trial. It settled after a federal judge and an appeals panel refused to dismiss the claim of gross negligence. And while the $850,000 settlement the directors paid was not a fine, it sure resembled one.

SP: But Hyde's letter said he got off with "no obligation to pay anyone anything."

EZ: The chairman of the House Judiciary Committee cut a separate deal to extricate himself from the suit. True enough. But that deal was no good until the 11 others paid their share of the $850,000. And in the end it undercut the key principle that being a director of a federally insured financial institution is a serious responsibility and that personal liability of directors is the public's defense against recklessness.

SP: How come he got such a sweet deal?

EZ: We can only guess. As we can only guess why there was apparently never any substantive pretrial discovery or interrogatories in the case and why the Federal Deposit Insurance Corp. has been stalling for more than a year on Roll Call newspaper's Freedom of Information Act request for its 206 boxes of Clydewater documents. But we're not going to get good answers until and unless the ethics committee in Congress takes a serious look.